The withholding tax rate on the distribution of a liquidation dividend will go up from 10% to 25% on 1 October 2014

Liquidation Tax

Since last year, the withholding tax rates on the distribution of all dividends is 25%. There was one exception, that is the distribution of liquidation dividend. The rate is still 10%, but that will go up to 25% on 1 October 2014The liquidation dividend is everything that is paid out to the shareholders upon liquidation of the company, in excess of the company's share capital. This rate also applies when a company redeems its own shares.

This measure will not have an impact for companies in international groups; the parent company will be entitled to the existing exemption under the EU Parent-Subsidiary Directive, and the extension (under Belgian law) to parent companies located in treaty countries.

Transitory measure

This measure may push many shareholders of cash rich companies to proceed with the liquidation of their company to preserve the reduced withholding tax rate, after 1 October 2014. That is why the law gives them an alternative ; they can secure the 10% liquidation tax by incorporating their taxed reserves into the share capital.

These taxed reserves can be distributed in the form of a dividend and withholding tax will be due at the rate of 10% insofar as these reserves (minus 10%) are then reincorporated in the company's paid up share capital.

These taxed reserves must have been in existence and determined on 31 March 2013. That means that the reserves must have been recorded in a set of accounts of an accounting period ending before 31 March 2013 and approved by the general assembly at the latest on 31 March 2013. For companies that held their AGM before 31 December, we are talking about the retained earnings in the 2012 accounts. However, most companies have not approved their annual accounts in the first quarter and they can only use the taxed reserves in the 2011 accounts.

The incorporation into the company's paid-up capital must be done during the last accounting year ending before 1 October 2014. For most companies, the accounting year is the calendar year. They will have to incorporate these reserves before 31 December 2013. There is no time to lose.

Changing the articles of association to extend the accounting year until June or September is of no use, since that will be disregarded.

When they have become capital, no more withholding tax will be due on those funds; the new 25% withholding tax is only due on the liquidation dividend in excess of the share capital. However, the company must keep these reserves in its capital for a period of five years (nine years for large companies).

If the company distributes its share capital in the first two year, 15% withholding tax will be due (10% + 15% = 25%). In the third year that is 10%, and in the fourth year still 5%. For large companies, the tax is 15% (years 1-4), 10% (years 5 and 6) and 5% (years 7 and 8).

Finally, the government does not want companies to postpone the payment of dividends for a period of four years to distribute them in the form of share capital. Companies must maintain their dividend policy in the year they incorporate their reserves and pay out the same dividend as in the past five years. Failing this, they will pay a special tax of 15% on the difference.It is noteworthy that the liquidation dividend does not exclude small companies from the small companies income tax rate (they cannot distribute more than 13% of their share capital by way of dividends).

What should you do ?

If you plan to retire on or before 1 October 2014, it may be a good idea to consider winding up your company and pay the of 10%.

Do you have a couple of years left until retirement ? If so, consider freezing the benefit of the 10% rate and turning your retained earnings into share capital. The cost of paying the 10% now may be good planning in the longer term.

However, if you do not consider retiring yet and your company is cash rich, forking out 10% now may seem money thrown away all the more since future reserves will be taxed at 25%. Winding up the company and starting with a new company with fresh capital may be attractive, all the more since the government has introduced a new measure to encourage shareholders to put fresh cash in companies.

A new 15% withholding tax rate for fresh capital

There will be a reduced withholding tax rate of 15% for dividends paid for new nominative shares in SMEs that have been issued against cash contribution after 1 July 2013. However, the tax rate is 25%, 20% and 15% on dividends distributed out of profits made in respectively the first, second and third (and any successive) accounting year following the cash contribution. However, that may require some careful planning as this may be seen as an abuse of a tax rule.